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Sydney, Oct 23, 2008 (ABN Newswire) - BHP Billiton and Rio Tinto have presented two very different attitudes to the state of demand for minerals and commodities generally from China.
A week ago, Rio saw China taking a breather, yesterday, BHP saw it as an example of short term volatility.
Figures out this week showed that Chinese gross domestic economic growth had slowed to an annual rate of 9% in the September quarter (with inflation down to 4.6% annual) from nearly 12% in 2007 and 10.1% in the June quarter.
That's a noticeable slowing, or "softening" as BHP characterised it. China accounts for around 20% of BHP's sales by value and its comments yesterday represent a maintaining of its fundamental belief in 'the China story'.
The world's biggest mining group delivered its assessment of China's current health when issuing its quarterly production review which showed strong gains in petroleum, iron ore, manganese and coal compared to the previous September quarter but declines in aluminium, diamonds and stainless steel materials.
"Consistent with the outlook statement given at our interim and preliminary results, China has not been immune to the global slowdown. Macroeconomic indicators show that Chinese growth has softened during the quarter, albeit from very high levels. We expect volatility and uncertainty to continue in the short term.
"Notwithstanding this short term uncertainty, we remain confident that the ongoing industrialisation and urbanisation of China and other developing economies will continue to drive strong longer term demand for our products.
"Our uniquely diversified portfolio of low cost and high quality assets places us at a competitive advantage in the current uncertain environment and we are well positioned to capitalise as markets recover.
"Our strong cash flow and balance sheet allows us to re-invest throughout the cycle, in our growth projects that are focused on lower risk brownfield expansions in high margin commodities."
In its third quarter production statement, Rio devoted a separate part of the report to China which in summary said:
"In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports. However, the near term slowdown of growth is substantially due to tightening of monetary policy introduced by the Chinese government last year in order to tackle inflation.
"Furthermore, we expect third quarter economic data to show an exaggerated slowdown, reflecting the postponement of projects during the Olympics. Looking further out, Chinese GDP will remain largely driven by the domestic economy and we expect industrialisation and urbanisation to continue apace with strengthening demand across a range of Rio Tinto products.
"With our cost competitive assets, resilient margins and strong customer base, Rio Tinto is well placed to weather the current economic weakness.
"Against the backdrop of the current markets, the Group is taking the opportunity to review the near term spending timelines and project costs of its capital expenditure programme, while preserving the optionality of its high quality growth pipeline overall."
Rio's comments last week help spark a sell-off of resource stocks here and around the world, aided by more weakness in copper, gold, oil and most other metals.
Rio's shares fell 17% after its third quarter statements and BHP was down 15% in a response that underlined investors' extreme sensitivity to the prospect of diminished growth from China, which has in large part fuelled the boom in commodities.
Yesterday, BHP's share price alone took the brunt of some selling.
The shares were down $2.06, or 7% at $27.25, but in contrast Rio shares rose $4.04, or more than 5% to $78.40. It was a rare day when the shares of both moved in different directions.
The shares of both companies will fall today after commodities plunged, led by oil down 8%, copper down 8% and gold down $US42 an ounce.
So was there something in BHP's first quarter production numbers to explain the weak share price?
Iron ore output rose 15% in the three months to September 30 to 29.82 million tonnes from the same quarter of the 2007-08 financial year as the company expanded projects in Western Australia.
Petroleum output increased by 15% as well to 34.8 million barrels of oil equivalent (MMBOE) thanks to newly commissioned projects and despite the impact of two hurricanes in the Gulf of Mexico.
Copper output was flat at 308,900 tonnes, with lower production at the Escondida mine in Chile offsetting an improved performance at Olympic Dam in South Australia.
That was a bit better than expected with the company forecasting a downturn this year thanks to falling grades at Escondida.
But BHP says copper output at Escondida will end up about 10% lower in the June 2009 year (the previous forecast was for a 10%-15% drop).
Nickel output dropped by 31% to 26,800 tonnes following a major furnace rebuild at the Kalgoorlie Nickel Smelter in WA and maintenance at the Yabulu refinery in Queensland.
Both were known and the fall was forecast. It came at a time when world nickel prices eased.
Production of metallurgical (hard coking) coal, used in steelmaking, dropped by 4% cent to 9.21 million tonnes as the company recovers from flooding in central Queensland at the start of the year.
Aluminium output dropped 8% during the quarter to 309,000 tonnes due to continuing power supply issues in South Africa, which has resulted in the partial shutdown of the Bayside smelter.
Uranium production from Olympic Dam climbed 19% to 1,110 tonnes due to improved recoveries and a record amount of mined material; manganese ore output jumped 27% to 1,830 tonnes after improved performance at GEMCO off the Northern Territory coast and at Hotazel in South Africa.
The company said it spent $US166 million ($A235.56 million) on mineral exploration during the first quarter and $US148 million ($A210.02 million) on petroleum exploration.
So overall, nothing really to frighten the market there. The iron ore and coking coal exports are all priced at 2009 record levels, but will come down next year in price talks due to start next month.
But the outlook for first half and full year earnings remains clouded by the weakness in prices, the strength of the US dollar and the impact of any price cuts for iron ore and coking coal. Certainly the sharp slump in oil prices will not help earnings, even with a lower Australian dollar.
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